UPDATE 4-Indonesia offers tax cut to miners, Freeport to soon resume exports

Thu Jul 24, 2014 9:44am EDT

* Miners must pay bond or build smelter to get lower tax

* Concentrate export tax cut to below 10 pct from 20-25 pct

* Freeport set to strike deal

* Newmont still in dispute (Recasts, updates details on export tax revision)

By Fergus Jensen

JAKARTA, July 24 (Reuters) - Indonesia has offered mining companies a tax concession to end a six-month dispute that has reduced mineral exports by half a billion dollars a month, pushed up the global price of some metals and led to thousands of layoffs.

The company with the biggest mining operations in the archipelago, Freeport-McMoRan Copper & Gold Inc, is set to become the first to take the deal and restart concentrate shipments from Grasberg, one of the world's largest copper mines. Freeport said on Wednesday that the signing of a memorandum of understanding (MOU) to resume exports was imminent.

After a cabinet meeting on mining policy on Thursday, Indonesia's chief economics minister Chairul Tanjung told reporters that Freeport was close to receiving an export permit.

If other miners follow suit, the deal will take some of the pressure off president elect Joko Widodo. Widodo was declared the winner of Indonesia's presidential elections this week and has said solving the dispute - which has sapped government mining revenues - would be one of his top priorities when he takes power in October.

It was unclear if the decision to revise the export tax rules was deliberately timed to coincide with the result of Indonesia's most tightly-contested election.

The second-largest copper miner in the country, Newmont Mining Corp, said on Wednesday that it, too, was negotiating an agreement to restart exports, but an Indonesian official denied any talks had taken place

"There have been no MOU discussions with Newmont. None at all," Coal and Minerals director general Sukhyar said on Thursday. "The government's position is we will face them in court."

The company has more work to do to rebuild its relationship with the government after angering authorities by suspending operation at its biggest Indonesian mine and filing for international arbitration in response to the move in January by Indonesia to raise export taxes on metal concentrates.

"The government will take stern action towards Newmont," Tanjung quoted President Susilo Bambang Yudhoyono as saying on Thursday.

He said also that Yudhoyono referred to the firm as "not valuing working on Indonesian soil, the birthplace of Indonesia's ancestors."

Newmont officials were not immediately available to respond to the comments.

Freeport and Newmont are Indonesia's top copper miners, and account for 97 percent of the nation's copper output.

TAX BREAK FOR SMELTER BOND

Indonesia will cut the tax levied on mineral concentrate exports to less than 10 percent for miners that pay a bond as a guarantee they will build a smelter later, Fiscal Policy chief Andin Hadiyanto told Reuters on Thursday, adding that the new regulation was due to be issued in August.

As construction of the smelter progresses, the export tax on concentrates would fall to zero, he added.

The government will also charge extra royalties on mineral sales to at least partly offset any loss in revenue, officials said.

In January, Indonesia imposed an escalating tax policy, which penalised any company which had not made progress on building a smelter by slapping them with a 25 percent tax on copper concentrate exports or a 20 percent tax on lead, zinc, iron and manganese shipments. The tax was due to increase annually to 60 percent in 2017.

The tax was intended to force miners to develop smelters and mineral processing facilities and part of a government push to derive bigger returns from Indonesia's mineral resources. But rather than pay it, most miners stopped exporting from Southeast Asia's biggest economy and one of the world's top mineral producers.

The government also banned the export of unprocessed ore, and that ban will remain in place,

FREEPORT'S AGREEMENT

As part of its deal, Freeport has agreed to pay more royalties, Hadiyanto said. Its royalties will rise to 4 percent on copper sales, Sukhyar said. It previously paid between 1.5 and 3.5 percent under an old deal, and the higher rate will bring it into line with royalties paid by other companies.

The government is expected to grant Freeport an export permit within two weeks, Sukhyar said. The company is Indonesia's biggest taxpayer, and earlier said its contributions would drop by $1.6 billion in 2014 as a result of declining output from the rule change in January.

Under the agreement, Freeport said it would pay a "significantly reduced" export duty in 2014, 2015 and 2016 but higher royalties on copper and gold sales. It would also pay a $115 million "assurance bond" against development of a smelter.

"It is a compromise to create a bridge for us so that we can return to normal operations," Freeport Chief Executive Richard Adkerson said of the MOU in an earnings call with analysts and investors.

Freeport and Newmont need the MOU to secure billion-dollar expansion plans, but at this stage no other companies that have contracts to operate in Indonesia were being asked to sign such documents before being eligible for export permits, Indonesian Mining Association (IMA) Executive Director Syahrir Abubakar told Reuters.

The older mining contracts that have their own tax rates are slowly being phased-out through renegotiation processes and are being replaced with special mining licenses that are subject to different rules and prevailing tax rates.

"There are no other cases like Freeport," Abubakar said, adding that other miners were waiting for the government to revise its tax regulation. "And if it's a reasonable figure, they'll accept it."

Investors in the copper market shrugged off news of the change. Copper on the London Metal Exchange (LME) was trading up 1.33 percent at $7,138.50 at 0112 GMT on growth in China's factory sector.

A North America-based concentrates trader said any resumption in exports from Indonesia would not be enough to dramatically increase supply, but would renew expectations of an oversupply in the market.

"A lot of people expected the market to be over-supplied," he said, adding that recent delays to mine output expansions had led to tighter conditions. (Additional reporting by Nina Adriana Kusuma, Randy Fabi and Gayatri Suroyo; Writing by Simon Webb; Editing by Raju Gopalakrishnan)

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